Moral Hazard Is Not Eliminated in Debt Financing Because

question 32

Multiple Choice

Moral hazard is not eliminated in debt financing because

• A)borrowers have an incentive to assume greater risk than is in the interest of the lender.
• B)firms with a great deal of debt often go bankrupt.
• C)principal-agent problems are greater with debt financing than with equity financing.
• D)the use of restrictive covenants tends to increase moral hazard.

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Definitions:

Purchased Price

The amount of money that has been paid to buy an asset, item, or service.

Compounded Annually

This refers to the process of earning interest on both the initial principal and the accumulated interest from previous periods, calculated once a year.

College Education

A form of higher education aiming to grant degrees in various fields of study, obtained after completing a program at a college or university.

Interest on Interest

The concept of earning interest on previously earned interest, contributing to compound growth.